Instructors: Employees or Independent Contractors?

In the past year, we have heard that the IRS is more strictly enforcing employee status for instructors of art and recreational programs.   In many cases, municipalities or arts organizations will offer classes and pay the instructors for the classes as independent contractors.  However, if the organization sets the time of the class, pays the instructor an hourly rate, and provides the class materials, the IRS is likely to classify the the instructor as an employee.   Even if the organization has a contract with the instructor and it seems like they have clearly defined their position, the IRS could still classify the worker as an employee.

The case of the City of Dana Point California is a good study of this situation.   You can find more details about the case here.   What is important to note is that city had the following items already in place, and the IRS still said the workers were employees:

1.  There was a written contract.
2.  The city had no control over the class curriculum or the way it was taught.
3. The instructor determined the number of classes offered each session; the length of the class; and the minimum/maximum number of students.
4. The city did not provide training to the instructors.
5. The instructors could provide training (and did) in other venues.
6. The instructor had to find and pay for their own substitutes or assistants.
7.  The instructor had to provide their own materials & supplies.
8. The instructor received a percentage of the revenue-not an hourly rate or payment per class.  (This demonstrates risk of loss.)

The City had to challenge the IRS in court and ultimately prevailed.  However, the IRS has contiuned to take the same position with other organizations and classify the workers as employees.

It is also important to note that even though the City of Dana Point prevailed with the IRS, other organizations cannot point to that situation in their defense.  If the IRS classified workers as employees and another organization disagreed, they would have to challenge the IRS on their own given their own situation and how they structure their relationship with their instructors.

Furthermoe, the 8 items noted above strengthened the City of Dana Point's position but many organizations do not have all 8 of those points existing in their current independent contractor situations, and actually have an even weaker case before the IRS.

So, what should you do?

1. Review the IRS site and the issues that the IRS considers.
2. If you decide that the worker is a contractor, document why and make sure you have a contract between the instructor and your organization.  Make sure the contract and your agreement is at least as strong as noted with the City of Dana Point.
3.  Recognize that even with the documentation and the contract, the IRS still might decide that your instructors are employees and if you will have to remedy the situation and pay related back taxes and possible fines or challenge the IRS in court and pay related attorney fees.  Determine if your organization is willing to take this risk.
4.  If you decide to classify the worker as an employee---as of the date of this post (2/6//12) the IRS has a Voluntary Classification Settlement Program.  You can go to this link to see Form 8952 that needs to be filed as well as related instructions.

Caution:  As with any tax or accounting advice on this blog (or any other blog) you should always contact your own tax or accounting advisor for their guidance on your specific situation before taking action.